US JOBS Act changes to fundraising rules

Calling it a “potential game changer,” President Obama signed the Jumpstart Our Business Startups Act (known as the JOBS Act) into law on April 5, 2012.  The SEC still has to implement changes in support of these new policies.

Whether you’re already raising capital or just now contemplating the optimal campaign strategy, this will help ease the process somewhat.  For example, companies using the “Regulation D, 506 private placement” will soon be able to freely advertise the investment opportunity online and elsewhere so long as you still ultimately accept checks from only accredited investors.

Also provisions to use “crowdsourcing” to raise funds allows for a wider pool of smaller investors with fewer restrictions.

The SEC is going to have up to 270 days from the enactment date (believe it when it happens) to interpret the basic concepts and turn them into practical rules & methods, but some provisions must be implemented within 90 days, so small and medium-size businesses that like the idea of crowdfunding are already preparing for the shift.

The changes due in early July will allow businesses selling shares of their private stock via two methods to publicly solicit funding.  In short, they’ll be able to let the broad community of investors know they are raising money. Previously, it was illegal for a small private startup to solicit funding like that, unless it was part of an initial public offering (IPO).  “Going public” on most US stock exchanges is typically reserved for later stage companies with serious capital requirements.

Specifically (and perhaps boringly), the SEC will be required to amend (1) Regulation D, Rule 506, which allows general solicitations and general advertising in raising private capital if the company continues to take reasonable steps to verify that such purchasers are accredited investors (using methods that the SEC will determine), and (2) Rule 144A to allow general solicitations and general advertising in private offerings conducted so long as all purchasers in the offering are reasonably believed to be qualified institutional buyers (QIBs).

As of this post date, the SEC has yet to work out exactly how it will implement this legislation.  We will follow up and describe the new rules as they are announced.

For full details on the JOBS Act implications, see 2015 update (In3 Group) – how to interpret the new rules posted on April 7, just two days after the new legislation was enacted.

Daniel Robin
Senior Partner
In3 Group